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Your Money: 401(k) fees make or break returns

Bet if I asked, the odds are good that many people could tell me to the penny what they just paid for a gallon of gas. So how much did it cost you to invest in your 401(k) last year? I don't know myself. And

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Bet if I asked, the odds are good that many people could tell me to the penny what they just paid for a gallon of gas.

So how much did it cost you to invest in your 401(k) last year? I don't know myself. And you likely don't know either.

Over the years, most of us have heard that if we just start saving a few hundred dollars a month in our 20s, we can retire a millionaire. Compound interest is your best friend.

But what about the fees in a 401(k)?

"I don't think they go out of their way to explain the consequences of what seems like a small innocent fee," said Martin Smith, the correspondent for "The Retirement Gamble," produced for PBS' Frontline.

Fees create what some call reverse compounding and reduce your nest egg over time. The higher the fees, in general, the greater the hit.

The Frontline piece, which ran Tuesday, took a hard look at how 401(k) savings are falling short for many people. The risks fall on the saver. One expert pointed out that the 401(k) is one of the only products that Americans buy but do not know the price of it.

The focus on fees in 401(k)s is relatively new. More information is being disclosed about fees after a new Labor Department rule. You might see a column of expense ratios, for example, for individual funds on a 401(k) statement, depending on where you work.

Truthfully, though, the only time I ever had a casual chat on 401(k) fees was about 15 years or so ago with a forward-thinking friend. More people talk about making money or losing money in their 401(k)s, not the fees.

Francis Vitagliano, visiting scholar at the Center for Retirement Research at Boston College, compares the lack of discussion to the time decades ago when food companies first had to put ingredients on labels. It took time before people started reading food labels and being concerned about sugar and salt, he said.

"Expenses are a very important factor in the return on investments over a very long period of time," Vitagliano said. "My guess in a year or two or so, we'll be a little bit more sensitive to it."

Take 2% in fees. In the Frontline episode, Jack Bogle, the founder of Vanguard, said during 50 years of investing the consumer with a 401(k) packed with 2% in annual fees — and a gross annual return of 7% — would lose almost two-thirds of what he or she would have had.

But the 2%-fee example, industry experts argue, is an extreme for the 401(k) universe.

Sean Collins, senior economist for the Investment Company Institute, a mutual fund trade group, said the weighted average expense ratio was 0.63% for 401(k) assets in equity funds and 0.50% for bond funds in 2012, the most recent data available. And the trend has been heading downward.

Vanguard gave me an example that shows that during a 30-year run an investment of $100,000 could build to $532,899 — under a low-cost scenario where annual costs are limited to 0.25%

By contrast, the investment would end up at $438,976 — under a higher-cost scenario where the annual costs were 0.90%.

That's a cost of almost $94,000 in 30 years. Or you'd end up with a nest egg that's reduced by nearly 18% if you opted for higher-cost funds. The yearly return in this example was 6%, which was reinvested.

Robert Hiltonsmith, policy analyst for Demos, a public policy group in New York, said some investors may mistakenly believe that higher-fee funds are going to give them higher returns.

But a fee structure doesn't offer a clue to future returns. No one, of course, can consider fees in a vacuum, either.

"If fees were the only consideration, the only thing you'd ever have in your 401(k) would be a money market fund," said Collins, of the mutual fund trade group.

"This is not to say that all high fees are bad and all low fees are good," Vitagliano said.

But expenses are taken out of returns and lower-cost index finds can be just fine for many 401(k) investors, he said.

Hiltonsmith, 31, said he sets aside 3% of his pay into his 401(k) — which he quickly admits isn't nearly enough — but says he faces high costs of living in New York and is paying down $45,000 in student loans. He makes $61,000 a year and has about $10,000 in 401(k) money.

The Frontline piece points out that one household can be paying 10 times as much as the household next door when it comes to fees in a 401(k) plan. Again, that might be a bit extreme.

But think about it. Your best friend could be paying far more than you for food or shoes or vacations. We're not one-price-fits-all consumers.

But we do seem to pay far more attention to the prices listed for milk and movie tickets than we do to the fees associated with the mutual funds we select for our 401(k) plans.

Contact Susan Tompor at 313-222-8876 or stompor@freepress.com. Follow her on Twitter @Tompor.